Chapter 5 - summary of CH5 - Marketing Management PDF

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Chapter 5: Creating Long-Term Loyalty RelationshipsWhat are customer value, satisfaction, and loyalty, and how cancompanies deliver them?Managers who believe the customer is the company’s only true “profit center” consider the traditional organization chart in Figure (a)—a pyramid with the president...

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Part 3 Connecting with customers

Chapter 5: Creating Long-Term Loyalty Relationships What are customer value, satisfaction, and loyalty, and how can companies deliver them?

Managers who believe the customer is the company’s only true “profit center” consider the traditional organization chart in Figure (a)—a pyramid with the president at the top, management in the middle, and frontline people and customers at the bottom. Successful marketing companies invert the chart to look like Figure (b). At the top are customers; next in importance are frontline people who meet, serve, and satisfy them.

Customer-Perceived Value (CPV) How do customers ultimately make choices? They tend to be value maximizers, within the bounds of search costs and limited knowledge, mobility, and income. Customers choose—for whatever reason—the offer they believe will deliver the highest value and act on it (Figure). Whether the offer lives up to expectation affects customer satisfaction and the probability that the customer will purchase the product again.

Defining Value Customer-perceived value (CPV) is the difference between the prospective customer’s evaluation of all the benefits and costs of an offering and the perceived alternatives. Total customer benefit is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering because of the product, service, people, and image. Total customer cost is the perceived bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market offering, including monetary, time, energy, and psychological costs.

Applying Value Concepts 1. Very often, managers conduct a customer value analysis to reveal the company’s strengths and weaknesses relative to those of various competitors. The steps in this analysis are: ● Identify the major attributes and benefits that customers value ● Assess the quantitative importance of the different attributes and benefits ● Assess the company’s and competitors’ performances on the different customer values against their rated importance ● Examine how customers in a specific segment rate the company’s performance against a specific major competitor on an individual attribute or benefit basis ● Monitor customer values over time 2. Influencing the choice process: By convincing the buyer.. 3. Deliver high customer value and create loyalty ● Loyalty has been defined as “a deeply held commitment to rebuy or repatronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.” 4. Use value proposition ● The value proposition consists of the whole cluster of benefits the company promises to deliver; it is more than the core positioning of the offering.

From slides

Total Customer Satisfaction Satisfaction is a person’s feelings of pleasure or disappointment that result from comparing a product or service’s perceived performance (or outcome) to expectations. If the experience below expectations customer will be dissatisfied. If equals he will be satisfied. If it exceeds then highly satisfied or delighted.

Monitoring Satisfaction Wise firms measure customer satisfaction regularly because it is one key to customer retention. Measurement Techniques: Periodic surveys, Customer loss rate, mystery shoppers.

Product and Service Quality Satisfaction will also depend on product and service quality. Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. Conformance quality (if deleiver promised quality) vs. performance quality (speed, fater…). Product and service quality, customer satisfaction, and company profitability are intimately connected. Higher levels of quality result in higher levels of customer satisfaction, which support higher prices and (often) lower costs. Studies have shown a high correlation between relative product quality and company profitability.

What is the lifetime value of customers, and how can marketers maximize it? Ultimately, marketing is the art of attracting and keeping profitable customers. Yet every company loses money on some of its customers. Midsize customers who receive good service and pay nearly full price are often the most profitable.

Customer Profitability A profitable customer is a person, household, or company that over time yields a revenue stream exceeding by an acceptable amount the company’s cost stream for attracting, selling, and serving that customer.

From figure above, customers are arrayed along the columns and products along the rows. Each cell contains a symbol representing the profitability of selling that product to that customer. Customer 1 is very profitable; he buys two profit-making products (P1 and P2). Customer 2 yields mixed profitability; she buys one profitable product (P1) and one unprofitable product (P3). Customer 3 is a losing customer because he buys one profitable product (P1) and two unprofitable products (P3 and P4).

Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called activity-based costing (ABC). ABC accounting tries to identify the real costs associated with serving each customer— the costs of products and services based on the resources they consume. The case for maximizing long-term customer profitability is captured in the concept of customer lifetime value. Customer lifetime value (CLV) describes the net present value of the stream of future profits expected over the customer’s lifetime purchases.

How can companies attract and retain the right customers and cultivate strong customer relationships and communities? Companies seeking to expand profits and sales must invest time and resources searching for new customers. To generate leads, there multiple methods: advertise in media, send direct mail and e-mails, send salespeople to participate in trade shows, purchase names from list brokers, and so on.

Reducing Defection / Customer Churn It is not enough to attract new customers; the company must also keep them and increase their business. Too many companies suffer from high customer churn or defection. Adding customers here is like adding water to a leaking bucket. To reduce the defection rate, the company must: 1. Define and measure its retention rate. For a magazine, subscription renewal rate is a good measure of retention. For a college, it could be first- to second-year retention rate or class graduation rate. 2. Distinguish the causes of customer attrition and identify those that can be managed better. Not much can be done about customers who leave the region or go out of business, but poor service, shoddy products, and high prices can all be addressed. 3. Compare the lost customer’s lifetime value to the costs of reducing the defection rate. As long as the cost to discourage defection is lower than the lost profit, spend the money to try to retain the customer.

Retention Dynamics / Marketing Funnel

Figure above, shows the main steps in attracting and retaining customers, imagined in terms of a funnel. Consumers must move through each stage before becoming loyal customers. By calculating conversion rates—the percentage of customers at one stage who move to the next—the funnel allows marketers to identify any bottleneck stage or barrier to building a loyal customer franchise. Consider these data about customer retention: ● Acquiring new customers can cost five times more than satisfying and retaining current ones. It requires a great deal of effort to induce satisfied customers to switch from their current suppliers. ● The average company loses 10 percent of its customers each year. ● A 5 percent reduction in the customer defection rate can increase profits by 25 percent to 85 percent, depending on the industry. ● Profit rate tends to increase over the life of the retained customer due to increased purchases, referrals, price premiums, and reduced operating costs to service.

Managing the Customer Base A key driver of shareholder value is the aggregate value of the customer base. Winning companies improve that value by excelling at strategies like the following: ● Reducing the rate of customer defection. ● Increasing the longevity of the customer relationship. ● Enhancing the growth potential of each customer through “share of wallet,” cross-selling, and upselling. ● Making low-profit customers more profitable or terminating them. ● Focusing disproportionate effort on high-profit customers.

Building Loyalty There marketing activities improve loyalty and retention: ● Interact closely with customers ● Develop loyalty programs ● Create institutional ties (Like Apple mac-user group less inclined to switch to other groups)

Brand Communities It is a specialized community of consumers and employees whose identification and activities focus around the brand. Three characteristics identify brand communities: 1. A “consciousness of kind,” or a sense of felt connection to the brand, company, product, or other community members; 2. Shared rituals, stories, and traditions that help convey the meaning of the community; and 3. A shared moral responsibility or duty to both the community as a whole and individual community members.

How do customers’ new capabilities affect the way companies conduct their marketing? Customer Relationship Management Customer relationship management (CRM) is the process of carefully managing detailed information about individual customers and all customer “touch points” to maximize loyalty. Customer touch point is any occasion when a customer encounters the brand and product. CRM is important because a major driver of company profitability is the aggregate value of the company’s customer base. A related concept, customer value management (CVM), describes the company’s optimization of the value of its customer base. CVM focuses on the analysis of individual data on prospects and customers to develop marketing strategies to acquire and retain customers and drive customer behavior.

Personalizing marketing is about making sure the brand and its marketing are as personally relevant as possible to as many customers as possible—a challenge, given that no two customers are identical. Customer Empowerment Marketers are helping consumers become evangelists for brands by providing them resources and opportunities to demonstrate their passion.

Customer Reviews and Recommendations Although the strongest influence on consumer choice remains “recommended by relative/friend,” an increasingly important decision factor is “recommendations from consumers.” With increasing mistrust of some companies and their advertising, online customer ratings and reviews are playing a growing role in the customer buying process.

Customer Complaints studies show that while customers are dissatisfied with their purchases about 25 percent of the time, only about 5 percent complain. The other 95 percent either feel complaining is not worth the effort or don’t know how or to whom to complain. They just stop buying. Of the customers who register a complaint, 54 percent to 70 percent will do business with the organizationagain if their complaint is resolved, it goes up to a staggering 95 percent if the customer feels the complaint was resolved quickly...